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Infographic: How to Utilize Store Contributions for Better Lease Negotiations

Team Tango

While COVID-19’s impact on retailers across the globe will undoubtedly have a long-term impact on everyday operations. Social distancing guidelines have altered occupancy limits and store layouts. But the pandemic’s immediate impact is being felt by retail tenants at one particular pain point: occupancy costs. Some restaurants and stores in major metropolitan areas remain shuttered while those in less densely populated areas likely reopened a few weeks or even months back. No matter the frontier, retailers are facing a new normal that requires them to reassess their real estate portfolio to cut costs and better position themselves for post-pandemic success. Now is the time for retail organizations to analyze their store performance in a pre-COVID environment to better understand which stores are contributing, which are not, and the critical next steps they can take to elevate their store location strategy in the current environment.

Knowing which stores are driving traffic and which are just collecting rent invoices will empower a retail organization’s decision making in terms of lease negotiations, cost-cutting measures and creating a more robust overall real estate strategy. Retailers can use our simple store contribution chart below to break down individual units by cash flow and strategy, and it provides our expert-backed insights that will help organizations make smarter, more informed decisions.

Part of being a smart retailer is being a smart tenant, so do not wait. The key to setting up an organization for long-term success once stores and restaurants have fully reopened is understanding individual store contributions from last year, and then taking the necessary actions like lease renegotiating with landlords or closing an underperforming location. Begin by analyzing individual store contribution for 12 months ending January. When retailers start to evaluate their operating stores, they ought to focus on the cash flow and other allocated expenses from each individual unit – but leave out corporate or other non-variable expenses.

Pre and Post-COVID Store Contribution Infographic

Pre and Post-COVID Store Contribution Infographic

The 5 Essential Post-COVID Key Store Contribution Categories

Cash Flow: Strong

Pre-COVID Strategy: Negotiate on Cycle

PostCOVID Strategy: Negotiate Now

Insights: These are the best stores: they are making money and, therefore, a retailer will very likely stay in these. Retailers may be able to trade a longer-term commitment or something else for concessions.

 

Cash Flow: Marginal

Pre-COVID Strategy: Negotiate on Cycle or Potential Closure

PostCOVID Strategy: Consolidate or Downsize

Insights: For marginal stores, consider consolidating or downsizing if there is marketable space that can be surrendered. If located in a mall with more than one brand, combine brands, as it will free up space that the landlord might be able to recover or can be sub-leased.

 

Cash Flow: Breakeven

Pre-COVID Strategy: Threaten to Close or Let Slowly Die

PostCOVID Strategy: Let Mature or Renegotiate

Insights: These stores may be new, so the costs are a little higher, and they have not grown into their sales yet. If the stores are older, they likely have very low rent and, while not the best store, they make some money and have a loyal customer base. Still, retailers will likely not be able to get these low-performing stores to zero. Consider shuttering these stores.

 

Cash Flow: Negative – Covers Some Rent

Pre-COVID Strategy: Wait for Lease to End

PostCOVID Strategy: Reduce Rent Cash Flow to $0

Insights: These stores are cash flow negative but closing them immediately would mean losing more money – so waiting until the end of the lease is likely the best course of action.

 

Cash Flow: Negative – Does Not Cover Rent

Pre-COVID Strategy: Close

PostCOVID Strategy: Close Immediately

Insights: These stores are cash-flow negative before rent, and do not even cover variable costs — they should already be closed. So, if they are not already, close them right away.

 

Are you interested in learning more about retailer best practices and insights from experts on surviving, and thriving, post-COVID? Watch out on-demand webinar, “Don’t Wait: Take Decisive Action to Reduce Occupancy Costs,” below.

Occupancy Costs Webinar